While Chinese companies are expanding their global reach, the U.S. judicial system is grappling to reconcile its transparent electronic discovery framework with China’s more opaque and relatively secretive legal system. In particular, the Chinese approach to e-discovery poses major challenges regarding the preservation and the accessibility of electronically stored information (ESI).

To complicate matters, American companies and their intellectual property are often at risk due to cyber-attacks from China. The recently retired Shawn Henry, former executive assistant director of the Federal Bureau of Investigation and head of the cybercrime unit, testified before Congress that cyber-theft poses “the greatest transfer of wealth in history.” When these attacks happen, the U.S. (as an obvious target) is vulnerable. This is because litigating with China as a means of legal recourse is not predictable, nor does it carry any guarantees of achieving complete e-discovery. The cases between China and the U.S. range from product liability issues to criminal indictments under the Foreign Corrupt Practices Act, with an ever-growing number of securities and intellectual property disputes mixed in.

Several factors are important when conducting business in and with China. The first is to understand that the corporate culture in China does not compare to that of the U.S to any meaningful degree. American notions of preservation and legal hold simply do not exist in China. For example, many Chinese executives use their personal email addresses for work, share community computers and have no formal archiving or document retention capabilities. These practices create an e-discovery nightmare, fraught with complex questions about data privacy and state secrets. Although Chinese companies doing business in the U.S. are technically bound to comply with the Federal Rules of Civil Procedure, this fact will not change Chinese corporate culture.

Given that U.S. law will not in and of itself compel a paradigmatic shift in the way Chinese corporations manage their information, an understanding of the Chinese legal system (excluding Hong Kong and Taiwan) is crucial. The People’s Republic of China (PRC) has a civil law system that has been influenced by Soviet and Continental European civil law systems. In these systems the legislature retains the power to interpret statutes. Unlike common law countries that rely on precedent, China’s laws are codified and passed by the National People’s Congress, administrative agencies and interpretations issued by the Supreme People’s Court.

Distinct from common law jurisdictions, the Chinese legal system does not explicitly allow for the discovery of information that either supports or damages the litigants’ claims. The law governing litigation in China—Civil Procedure Law—contains very different guidelines than those of other common law jurisdictions, which serve to restrict the scope of discovery. Although there is a trend to allow for the exchange of evidence in litigation, Chinese law does not require the exchange. Therefore, parties accustomed to American/UK-style e-discovery/e-disclosure cannot rely on discovery as a means of controlling litigation.

Another factor that limits the scope of discovery in China is the parties’ reluctance to disclose sensitive information that might be deemed a state secret. Divulgence of such information would amount to a violation of PRC law. With an increasing amount of cross-border litigation, the chances that such information would be exported outside of China are heightened; thus, parties have to pay particular attention to avoid fines or even criminal liabilities when seeking discovery. The definition of a state secret under PRC law includes a wide range of information and is more ambiguous than Western definitions about national security (for example, the Chinese definitions are less defined than those in the U.S. Patriot Act). Politically sensitive data is susceptible to the government’s scrutiny and protection, regardless of whether it is possessed by PRC citizens or officials working for foreign corporations.

Chinese courts are not necessarily sympathetic towards the discovery or investigatory requirements of U.S. regulatory bodies. For example, in the still unresolved Steven Jacobs v. Las Vegas Sands case, the defendant alleged that relevant ESI could not be produced because Chinese privacy and data protection laws prohibited the release of this information without the permission of local Chinese authorities.

Currently, the Supreme People’s Court on Evidence in Civil Proceeding provides for the exchange of evidence in the following scenarios:

The people's court may, on the basis of the application of one of the parties, arrange an exchange of evidence prior to the holding of any court hearing.

In any case involving a significant volume of evidence or relatively complex issues, the court shall arrange for the parties to exchange evidence following the expiration of the time period for reply.

In practice though, the exchange of evidence in China is difficult because there is still a lack of clear guidance for the implementation of these rules.

The conflicting corporate practices, different discovery laws and complications of stringent data protection and privacy laws are all challenges the U.S. has in litigation involving China. The economic and cyber-theft inequality the U.S. is experiencing are also conflicting factors that create a tension between wanting to maintain a good relationship and pursuing intellectual property theft. All of this is further compounded by the inability to gather relevant evidence once a lawsuit is filed. In the near term, there will be landmark cases decided in U.S. courts that hinge on these disparate discovery approaches. The velocity of business transacting between China and the U.S. will not accept the differences in legal systems for much longer without some clearer path toward reconciliation.